Business context and reporting period
This is ACE Limited’s unaudited Form 10-Q for the quarter and six months ended June 30, 2015—not a filing by Chubb Limited. ACE is a global insurance and reinsurance group with five reporting segments. On June 30, 2015, ACE agreed to acquire The Chubb Corporation.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net premiums written | $4.784bn | $4.559bn | $8.860bn | $8.744bn |
| Net premiums earned | $4.360bn | $4.332bn | $8.287bn | $8.302bn |
| Total revenues | $5.048bn | $4.815bn | $9.437bn | $9.234bn |
| Net income | $942m | $779m | $1.623bn | $1.513bn |
| Diluted EPS | $2.86 | $2.28 | $4.91 | $4.43 |
| Net investment income | $562m | $556m | $1.113bn | $1.109bn |
Q2 revenue rose 4.8% and net income rose 20.8%; first-half revenue increased 2.2% and net income increased 7.2%. Written premiums grew 4.9% in Q2 and 1.3% year to date as reported; on a constant-dollar basis, growth was 10.8% and 6.5%, respectively. Q2 P&C combined ratio was 87.7% versus 87.5%; GAAP combined ratio was 87.6% versus 87.7%. The current accident-year combined ratio excluding catastrophe losses was 88.4% versus 88.7%.
Operating cash flow was $1.891bn for the first half, down from $2.096bn; Q2 operating cash flow was $816m. Investing activities used $1.020bn and financing activities used $659m in the first half. Cash was $790m at June 30, 2015. Total assets were $99.840bn and shareholders’ equity was $29.555bn. Total debt was $6.259bn, up from $5.909bn at year-end; debt-to-total capitalization was 17.3%, compared with 16.5%. The $1.0bn credit line had $482m drawn, and ACE reported meeting its financial covenants.
Material changes versus prior period
- Q2 net income benefited from $126m in net realized gains, compared with a $73m loss a year earlier. A $104m Q2 realized gain related to lower fair value of variable-annuity living-benefit liabilities; the filing notes market and policyholder assumptions can materially affect this valuation.
- First-half P&C combined ratio remained 88.0% year over year. Favorable prior-period reserve development was $236m versus $188m in the first half of 2014; Q2 development was $153m versus $126m.
- Q2 catastrophe losses, including reinstatement premiums, were $124m versus $80m. First-half catastrophe losses excluding reinstatement premiums were $175m versus $133m.
- Fireman’s Fund high-net-worth personal-lines acquisition added $378m to North American P&C premiums. The acquisition also produced a non-recurring $252m transfer of unearned premium reserves; management reported a $20m pretax Q2 net-income benefit after related intangible amortization. This benefit is not expected to recur in 2016.
- Q2 shareholders’ equity was affected by $672m of after-tax unrealized investment losses, primarily from rising interest rates. First-half comprehensive income fell to $1.039bn from $2.456bn, reflecting substantially lower OCI.
- ACE issued $800m of 3.15% senior notes due 2025 and repaid $450m of 5.6% notes at maturity. Share repurchases were $734m in the first half; management elected to discontinue repurchases in connection with the planned Chubb acquisition.
Outlook, risks and unusual items
No specific consolidated earnings guidance was provided. Management said operating cash flows should cover near-term outflows under most loss scenarios. It described competitive, flat-to-declining pricing in parts of P&C and reinsurance, and cited currency movements as a drag on reported premium growth and investment income. The 2016 U.S. crop-insurance agreement was reported to have no significant changes and no material change to ACE’s outlook for that program.
The proposed Chubb transaction was valued at approximately $28.3bn based on ACE’s June 30 share price. Chubb shareholders were to receive $62.93 cash and 0.6019 ACE shares per share, with former Chubb shareholders expected to own about 30% of the combined company. ACE planned to fund the cash portion using $9bn from ACE and Chubb companies and $5.3bn of senior notes. Closing was expected in Q1 2016, subject to shareholder, antitrust and insurance-regulatory approvals. The filing cautions that financing, approvals, integration, synergies and completion are uncertain; ACE stated it was obligated to complete the deal even if sufficient cash consideration funds were unavailable.
Other material risks include catastrophe and reserve-estimation uncertainty; collectability of reinsurance recoverables; market and foreign-exchange volatility; and interest-rate sensitivity. ACE estimated a 100-basis-point rise in rates could reduce the fixed-income portfolio’s value by about $2.4bn. Modeled 1-in-100-year net PMLs were $1.766bn for U.S. hurricane and $769m for California earthquake; management cautioned that modeled losses are uncertain and actual losses may differ materially. The filing also identifies potential acquisition-related litigation and integration risks. Management considered ordinary-course legal matters unlikely to be material to consolidated condition or results.
Most important facts for investors to verify
- Whether the Chubb merger received all shareholder and regulatory approvals, closed on schedule, and was financed on the stated terms.
- How much of earnings growth depended on realized investment and variable-annuity fair-value gains, favorable reserve development, and the non-recurring Fireman’s Fund purchase-accounting benefit.
- Whether underlying underwriting performance, catastrophe exposure, and reserve estimates remain consistent with reported combined ratios and favorable prior-period development.
- Whether interest-rate, foreign-exchange and investment-market movements materially affect OCI, capital, liquidity or reported earnings.
- Whether reinsurance recoverables, restricted assets, available credit capacity and debt levels remain adequate as the acquisition and integration proceed.